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EX-31.2 - GULF RESOURCES, INC.e608769_ex31-2.htm
EX-31.1 - GULF RESOURCES, INC.e608769_ex31-1.htm
EX-32.1 - GULF RESOURCES, INC.e608769_ex32-1.htm
 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended June 30, 2011
   
 
Or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from _________ to _________

Commission File Number: 000-20936

GULF RESOURCES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
13-3637458
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
99 Wenchang Road, Chenming Industrial Park, Shouguang City, Shandong, China
 
262714
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: +86 (536) 567 0008

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  
Large accelerated filer o
Accelerated filer x
Non-accelerated filer (Do not check if a smaller reporting company) o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

As of August 11, 2011, the registrant had outstanding [34,644,842] shares of common stock.
 
 

 
       
Table of Contents
 
    
 
PART I—FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
GULF RESOURCES, INC.
 AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
(UNAUDITED)
 
   
June 30, 2011
   
December 31, 2010
 
Current Assets  
           
Cash
 
$
59,738,125
   
$
68,494,480
 
Accounts receivable
   
36,229,621
     
21,542,229
 
Inventories
   
3,151,972
     
2,679,899
 
Prepayments and deposits
   
46,134
     
939,940
 
Prepaid land leases
   
300,385
     
42,761
 
Deferred tax assets
    1,712      
99,694
 
Other receivable
   
151,853
     
-
 
Total Current Assets
    99,619,802      
93,799,003
 
Non-Current Assets                
Property, plant and equipment, net
   
140,623,447
     
112,178,999
 
Property, plant and equipment under capital leases, net
   
2,444,867
     
-
 
Prepaid land leases, net of current portion
   
751,996
     
743,022
 
Deferred tax assets
    2,034,568       -  
Total non-current assets     145,854,878       112,922,021  
Total Assets
 
$
245,474,680
   
$
206,721,024
 
                 
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Accounts payable and accrued expenses
 
$
8,044,689
   
$
6,419,735
 
Retention payable
   
1,623,338
     
453,000
 
Capital lease obligation, current portion
   
82,847
     
-
 
Taxes payable
   
8,035,313
     
7,163,095
 
Total Current Liabilities
   
17,786,187
     
14,035,830
 
Non-Current Liabilities
               
Capital lease obligation, net of current portion
   
2,956,391
     
-
 
Total Liabilities
 
$
20,742,578
   
$
14,035,830
 
 
               
Stockholders’ Equity
               
PREFERRED STOCK ; $0.001 par value; 1,000,000 shares authorized; none outstanding
 
$
-
   
$
-
 
COMMON STOCK; $0.0005 par value; 100,000,000 shares authorized; 34,745,342 and 34,735,912 shares issued; and 34,644,842 and 34,735,912 shares outstanding as of June 30, 2011 and December 31, 2010, respectively
   
17,373
     
17,368
 
Treasury stock
   
(348,147
)
   
-
 
Additional paid-in capital
   
69,795,579
     
66,626,584
 
Retained earnings unappropriated
   
130,888,339
     
106,500,085
 
Retained earnings appropriated
   
10,271,293
   
 10,271,293
 
Cumulative translation adjustment
   
14,107,665
     
9,269,864
 
Total Stockholders’ Equity
   
224,732,102
     
192,685,194
 
Total Liabilities and Stockholders’ Equity
 
$
245,474,680
   
$
206,721,024
 

The accompanying notes are an integral part of these consolidated financial statements.
   
    
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Expressed in U.S. dollars)
(UNAUDITED)

 
Three-Month Period Ended June 30,
   
Six-Month Period Ended June 30,
 
 
2011
   
2010
   
2011
   
2010
 
                     
NET REVENUE
                   
Net revenue
  $ 51,300,812     $ 46,751,809     $ 96,679,344     $ 76,445,227  
                                 
OPERATING EXPENSES
                               
Cost of net revenue
    (24,994,703 )     (23,470,972 )     (45,586,087 )     (39,706,471 )
Sales, marketing and other operating expenses
    (23,733 )     (75,687 )     (47,745 )     (96,385 )
Research and development cost
    (133,519 )     (596,151 )     (313,856 )     (721,353 )
Exploration cost
    (3,867,286 )     -       (3,867,286 )     -  
Write-off / Impairment on property, plant and equipment      (7,570,566 )     -       (7,570,566 )     -  
General and administrative expenses
    (1,714,694 )     (731,593 )     (6,055,985 )     (2,988,386 )
      (38,304,501 )     (24,874,403 )     (63,441,525 )     (43,512,595 )
                                 
INCOME FROM OPERATIONS
    12,996,311       21,887,406       33,237,819       32,932,632  
                                 
OTHER INCOME (EXPENSE)
                               
Interest expense
    (65,740 )     (52 )     (107,956 )     (226 )
Interest income
    52,731       59,824       128,775       113,584  
Sundry income
    392,298       -       415,083       21,998  
INCOME BEFORE TAXES
    13,375,600       21,937,178       33,673,721       33,067,988  
                                 
INCOME TAXES
    (3,352,345 )     (5,510,733 )     (9,285,467 )     (8,649,407 )
NET INCOME
  $ 10,023,255     $ 16,426,445     $ 24,388,254     $ 24,418,581  
                                 
COMPREHENSIVE INCOME:
                               
NET INCOME
  $ 10,023,255     $ 16,426,445     $ 24,388,254     $ 24,418,581  
OTHER COMPREHENSIVE INCOME
                               
- Foreign currency translation adjustments
    2,816,166       682,396       4,837,801       662,662  
COMPREHENSIVE INCOME
  $ 12,839,421     $ 17,108,841     $ 29,226,055     $ 25,081,243  
                                 
EARNINGS PER SHARE:
                               
BASIC
  $ 0.29     $ 0.47     $ 0.70     $ 0.71  
DILUTED
  $ 0.29     $ 0.47     $ 0.69     $ 0.70  
                                 
WEIGHTED AVERAGE NUMBER OF SHARES:
                               
                                 
BASIC
    34,729,179       34,587,479       34,732,527       34,574,514  
DILUTED
    34,733,188       34,738,667       35,128,273       34,750,714  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
   
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
THREE-MONTH PERIOD ENDED JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)
 
   
Common stock
                                     
   
Number
   
Number
   
Number
               
Additional
   
Statutory
         
Cumulative
       
   
of shares
   
of shares
   
of treasury
         
Treasury
   
paid-in
   
common
   
Retained
   
translation
       
   
issued
   
outstanding
   
stock
   
Amount
   
stock
   
capital
   
reserve
   
earnings
   
adjustment
   
Total
 
                     
$
   
$
   
$
   
$
   
$
   
$
   
$
 
BALANCE AT DECEMBER 31, 2010
    34,735,912       34,735,912       -       17,368       -       66,626,584       10,271,293       106,500,085       9,269,864       192,685,194  
                                                                                 
Translation adjustment
 
- 
      -       -    
- 
           
- 
   
- 
   
- 
      4,837,801       4,837,801  
Common stock repurchased
    -       (100,500 )     100,500       -       (348,147 )     -       -       -       -       (348,147
Common stock issued for exercising stock options
 
9,430 
      9,430       -    
5 
              (5  
- 
   
- 
      -       -  
Issuance of warrants to non-employees
    -       -       -       -       -       452,000       -       -       -       452,000  
Issuance of stock options to employees
    -       -       -       -       -       2,717,000       -       -       -       2,717,000  
Net income for six-month period ended June 30, 2011
 
- 
      -       -    
- 
      -    
- 
   
- 
      24,388,254    
- 
      24,388,254  
BALANCE AT JUNE 30, 2011
    34,745,342       34,644,842       100,500       17,373       (348,147 )     69,795,579       10,271,293       130,888,339       14,107,665       224,732,102  

The accompanying notes are an integral part of these consolidated financial statements.
   
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollars)
(UNAUDITED)

 
   
Six-Month Period Ended June 30,
 
   
2011
   
2010
 
   
 
   
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
   
 
 
Net income
 
$
24,388,254
   
$
24,418,581
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Interest on capital lease obligation
   
106,835
     
-
 
Amortization of prepaid land leases
   
102,831
     
46,379
 
Depreciation and amortization
   
7,468,616
     
4,787,674
 
Write-off / Impairment loss on property, plant and equipment
   
7,570,566
     
-
 
Stock-based compensation expense
   
3,169,000
     
1,188,966
 
Deferred tax asset
   
(1,913,608
)
 
(21,445
)
Changes in assets and liabilities:
             
Accounts receivable
   
(14,033,743
)
   
(10,055,752
)
Inventories
   
(405,227
)
   
19,405
 
Prepayments and deposits
   
905,669
     
(682,423
)
Other receivables
   
(151,853
)
   
-
 
Accounts payable and accrued expenses
   
1,468,892
     
4,920,174
 
Taxes payable
   
697,706
     
3,320,663
 
Net cash provided by operating activities
   
29,373,938
     
27,942,222
 
               
CASH FLOWS USED IN INVESTING ACTIVITIES
             
Additions of prepaid land leases
   
(348,196
)
   
(50,940
)
Purchase of property, plant and equipment
   
(34,075,105
)
   
(20,283,022
)
Increase in construction in progress
   
(4,609,456
)
   
(551,699
)
Net cash used in investing activities
   
(39,032,757
)
   
(20,885,661
)
               
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
             
Proceeds from exercising stock options
   
-
     
18,000
 
Proceeds from private placement
   
-
   
2,192,919
 
Repurchase of common stock
   
(348,147
)
 
-
 
Repayment of capital lease obligation
   
(288,739
)
 
-
 
Advance from a related party
   
-
   
231,210
 
Net cash (used in)/provided by financing activities
   
(636,886
)
   
2,442,129
 
               
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
   
1,539,350
     
161,947
 
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
   
(8,756,355
)
   
9,660,637
 
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
   
68,494,480
     
45,536,735
 
CASH AND CASH EQUIVALENTS - END OF PERIOD
 
$
59,738,125
   
$
55,197,372
 

 
The accompanying notes are an integral part of these consolidated financial statements.
 
       
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Expressed in U.S. dollars)
(UNAUDITED)
 
   
Six-Month Period Ended June 30,
 
   
2011
   
2010
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
   
 
 
Cash paid during the period for:
 
 
   
 
 
Income taxes
 
$
10,341,857
   
$
6,157,079
 
Interest paid
 
1,121
   
226
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
           
Inception of capital lease obligation for acquiring property, plant and equipment
 
$
3,127,913
   
-
 
                 
Issuance of stock options to employees
 
2,717,000
   
$
-
 
                 
Issuance of warrants to non-employees
 
$
452,000
   
-
 
                 
Issuance of common stock for exercising stock options
 
$
5
   
-
 
                 
Issuance of common stock for exercising warrants
 
$
-
   
8
 
                 
Issuance of common stock for acquiring property, plant and equipment
 
$
-
   
608,227
 

The accompanying notes are an integral part of these consolidated financial statements.
 
     
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)           Basis of Presentation

The accompanying condensed financial statements have been prepared by Gulf Resources, Inc. a Delaware corporation and its subsidiaries (collectively, the “Company”), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“US GAAP”). The balance sheet at December 31, 2010 is derived from the audited balance sheet at that date which is not presented herein.

In the opinion of management, the unaudited financial information for the quarter ended and six-month period ended June 30, 2011 presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of results of operations, financial position and cash flows. These condensed financial statements should be read in conjunction with the financial statements included in the 2010 Form 10-K. Operating results for the interim periods are not necessarily indicative of operating results for an entire fiscal year.
 
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. The Company also exercises judgments in the preparation of these condensed financial statements in the areas including classification of leases and related party transactions.
 
(b)           Nature of the Business

The Company manufactures and trades bromine and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC"), and manufactures chemical products for use in the oil industry and paper manufacturing industry through its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited ("SYCI") in The People’s Republic of China (“PRC”).

(c)           Allowance for Doubtful Accounts

As of June 30, 2011 and December 31, 2010, allowance for doubtful accounts were nil. No allowances for doubtful accounts were charged to the income statement for the three-month and six-month periods ended June 30, 2011 and 2010.

(d)           Concentration of Credit Risk

The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the Company’s cash and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial Bank of China Limited and China Merchants Bank Company Limited, which are not insured or otherwise protected. The Company placed $59,688,124 and $68,444,480 with these institutions as of June 30, 2011 and December 31, 2010, respectively.  The Company has not experienced any losses in such accounts in the PRC.

Concentrations of credit risk with respect to accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However, such concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial condition and due to the generally short payment terms.  The balances of accounts receivable as of June 30, 2011 and December 31, 2010 are all amounts outstanding for less than three months.

(e)           Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives.

Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter.
   
  
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 (Expressed in U.S. dollars)
(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

(e)           Property, Plant and Equipment – Continued

Construction in progress primarily represents direct costs of construction of plant, machinery and equipment. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences. Cost of repairs and maintenance is expensed as incurred.

The Company’s depreciation and amortization policies on property, plant and equipment other than mineral rights and construction in progress, are as follows:
 
 
Useful life
(in years)
Buildings (including salt pans)
15 - 20
Plant and machinery
5 - 8
Motor vehicles
5
Furniture, fixtures and equipment
8
 
For the three-month period ended June 30, 2011, the Company changed the estimated useful life of certain protection shell/brick of transmission channels and ducts included in plant and machinery from 8 years to 5 years, resulting in an increase of depreciation in the amount of $548,859 for the three-month period ended June 30, 2011.
 
Property, plant and equipment under capital leases are depreciated over their expected useful lives on the same basis as owned assets, or where shorter, the term of the lease, which is 20 years.

(f)           Retirement Benefits

Pursuant to the relevant laws and regulations in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization. The Company makes contributions to the retirement scheme at the applicable rate based on the employees’ salaries.  The required contributions under the retirement plans are charged to the consolidated income statement on an accrual basis when they are due.  The Company’s contributions totaled $105,537 and $132,964 for the three-month periods ended June 30, 2011 and 2010, respectively, and totaled $226,912 and $242,966 for the six-month periods ended June 30, 2011 and 2010, respectively.

(g)           Mineral Rights

The Company follows the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 that certain mineral rights are considered tangible assets and that mineral rights should be accounted for based on their substance. Mineral rights are included in property, plant and equipment.

(h)           Revenue Recognition

The Company recognizes revenue, net of value-added tax, when persuasive evidence of an arrangement exists, delivery of the goods has occurred, customer acceptance has been obtained, which means the significant risks and ownership have been transferred to the customer, the price is fixed or determinable and collectability is reasonably assured.

(i)           Shipping and Handling Fees and Costs

The Company does not charge its customers for shipping and handling.  The Company classifies shipping and handling costs for purchase of raw materials as part of the cost of net revenue. For the three-month periods ended June 30, 2011 and 2010, shipping and handling costs were $167,657 and $164,440, respectively. For the six-month periods ended June 30, 2011 and 2010, shipping and handling costs were $281,228 and $285,311, respectively.
   
(j)           Exploration Cost

Exploration costs, which included the cost of researching appropriate places to drill and the cost of actual drilling of potential natural brine resources, were charged to the income statement as incurred. For the three-month and six-month periods ended June 30, 2011, the Company incurred exploration cost in the amount of $3,867,286 in Sichuan province, PRC, for the drilling of exploratory wells and its associated facilities in order to confirm and measure the resources of natural brine in the areas of drilling. The exploratory wells are still under construction and expected to complete by end of 2011.
 
  
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 (Expressed in U.S. dollars)
(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

(k)           Cash and Cash Equivalents

Cash and cash equivalents consist of all cash balances and highly liquid investments with original maturities of three months or less.  Because of short maturity of these investments, the carrying amounts approximate their fair values.

(l)           Impairment or Disposal of Long-lived Assets

In accordance with ASC 360-10-35 “Impairment or Disposal of Long-lived Assets”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.

The Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the carrying amount of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount of the asset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value of such assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of the long-lived asset that will be sold or disposed of to their estimated fair values. Charges for the asset impairment reduce the carrying amount of the long-lived assets to their estimated salvage value in connection with the decision to dispose of such assets.

For the three-month and six-month periods ended and as of June 30, 2011, the Company made impairment of long-lived assets for the relocation of Factory No. 4 and idle plant and machinery in the amount of $3,873,087. The Company determined that there was no impairment of long-lived assets as of December 31, 2010.
 
(m)           Income Taxes
 
The Company accounts for income taxes in accordance with the Income Taxes Topic of the FASB ASC, which requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their reported amounts at each period end. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The guidance also provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical merits.
 
(n)           Leasing arrangements
 
Rentals payable under operating leases are charged to the statements of income on a straight line basis over the term of the relevant lease. For capital leases, the present value of future minimum lease payments at the inception of the lease is reflected as an asset and a liability in the statement of financial position. Amounts due within one year are classified as short-term liabilities and the remaining balance as long-term liabilities.
 
(o)           Contingencies
 
The Company accrues for costs relating to litigation, including litigation defense costs, claims and other contingent matters, including liquidated damage liabilities, when such liabilities become probable and reasonably estimable.  Such estimates may be based on advice from third parties or on management’s judgment, as appropriate.  Revisions to accruals are reflected in earnings (loss) in the period in which different facts or information become known or circumstances change that affect the Company’s previous assumptions with respect to the likelihood or amount of loss.  Amounts paid upon the ultimate resolution of such liabilities may be materially different from previous estimates.
 
(p)           Basic and Diluted Net Income per Share of Common Stock

Basic earnings per common share are based on the weighted average number of shares outstanding during the periods presented.  Diluted earnings per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Anti-dilutive common stock equivalents which were excluded from the calculation of number of dilutive common stock equivalents amounted to 1,378,847 and 8,221 shares for the three-month periods ended June 30, 2011 and 2010, respectively, and amounted to 241,002 and 3,053 shares for the six-month periods ended June 30, 2011 and 2010, respectively.

The following table sets forth the computation of basic and diluted earnings per share:
 
  
 
Three-Month Period Ended June 30,
   
Six-Month Period Ended June 30,
   
2011
   
2010
     
2011
     
2010
 
Numerator
                           
Net income
 
$
10,023,255
   
$
16,426,445
   
$
24,388,254
   
$
24,418,581
 
                                 
Denominator
                               
Basic: Weighted-average common shares outstanding during the period
   
34,729,179
     
34,587,479
     
34,732,527
     
34,574,514
 
Add: Dilutive effect of stock options
   
4,009
     
151,188
     
395,746
     
176,200
 
Diluted
   
34,733,188
     
34,738,667
     
35,128,273
     
34,750,714
 
                                 
Net income per share
                               
Basic
 
$
0.29
   
$
0.47
   
$
0.70
   
$
0.71
 
Diluted
 
$
0.29
   
$
0.47
   
$
0.69
   
$
0.70
 
 
    
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

(q)           Foreign Currency Translations and Transactions

The Company’s operations in the PRC use the local currency, Renminbi (“RMB”), as their functional currency, whereas amounts reported in the accompanying condensed consolidated financial statements and disclosures are stated in the United States dollar (“USD” or “$”), the functional currency and the reporting currency of the Company.

As such, the Company uses the “current rate method” to translate its PRC operations from RMB into USD, as required under ASC 830 “Foreign Currency Matters”. The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s PRC subsidiaries from RMB into USD are recorded in stockholders’ equity as part of accumulated comprehensive income. The consolidated statement of income and comprehensive income is translated at average rates during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net income for the reporting periods. The consolidated statement of cash flows is translated at average rates during the reporting period, with the exception of issuance of shares and payment of dividends which are translated at historical rates.

(r)           New Accounting Pronouncements

No accounting standards and guidance with an effective date during the six-month period ended June 30, 2011 or issued during 2011 had or expected to have a significant impact on the Company’s condensed consolidated financial statements.
 
NOTE 2 – ASSETS ACQUISITIONS
 
Pursuant to the lease contract signed by SCHC on November 5, 2010 with State-Operated ShouguanQingshuibo Farm (the “Lessor”), the Company recognized in January 2011 (1) a 20-year capital lease of a real property adjacent to Factory No. 1, with the related production facility, channels and ducts, other production equipment and the buildings located on the property, with an annual payment of Renminbi (“RMB”)1,877,000 (approximately $290,034) up to December 31, 2030 to the Lessor, aggregating $3,127,913 (the present value of the minimum lease payments); and (2) a 20-year land lease and rights to new extraction wells on which the aforesaid real property, production facilities, channels and ducts, other production equipment and the buildings are situated, with an annual payment of RMB3,123,000 (approximately $482,566) up to December 31, 2030 to the Lessor.  The lease was accounted for under FASB ASC 840-10-25 “Leases – Recognition” and $3,127,913 was included in property, plant equipment under capital lease as of June 30, 2011.
 
The Company also enhanced the new plant and machinery in the first quarter of 2011 by making capital improvement in reconstruction and renovation work at a cost of approximately $3,050,400, which was recorded as buildings and plant and machinery, for the operation of the aforesaid real property, production facilities, channels and ducts, other production equipment and the buildings located on the property.

During the quarter ended June 30, 2011, the Company carried out enhancement projects to its existing bromine extraction and crude salt production facilities.  In particular, the Company incurred reconstruction and renovation works at a cost of approximately $12,379,153 for its crude salt fields in Factory No. 1, 5 to 9, and at a cost of approximately $20,087,600 for its extraction wells and transmission channels and ducts in Factory No. 1 to 9.  The above enhancement projects have estimated useful lives of 5 to 8 years and are capitalized as buildings and plant and machinery.

NOTE 3 – INVENTORIES

Inventory consists of:
   
June 30,
2011
   
December 31,
2010
 
             
Raw materials
 
$
754,324
   
$
769,817
 
Finished goods
   
2,404,497
     
1,916,775
 
Allowance for obsolete and slow moving inventory
   
(6,849
)
   
(6,693
)
   
$
3,151,972
   
$
2,679,899
 
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)
 
NOTE 4 – PREPAID LAND LEASES
 
The Company prepaid for land leases with lease terms for periods ranging from twenty to fifty years to use the land on which the office premises, production facilities and warehouse of the Company are situated. The prepaid land lease is amortized on a straight line basis. During the three-month period ended June 30, 2011, amortization of prepaid land lease totaled $72,989, which was recorded as cost of net revenue.  During the three-month period ended June 30, 2010, amortization of prepaid land lease totaled $24,322, of which $24,175 and $147 were recorded as cost of revenue and administrative expenses respectively. During the six-month period ended June 30, 2011, amortization of prepaid land lease totaled $102,831, which was recorded as cost of net revenue.  During the six-month period ended June 30, 2010, amortization of prepaid land lease totaled $46,379, of which $46,085 and $294 were recorded as cost of net revenue and administrative expenses respectively.

The Company has the rights to use certain parcels of land located in Shouguang, the PRC, through lease agreements signed with local townships.  Such parcels of land are collectively owned by local townships and accordingly, the Company could not obtain land use rights certificates on these parcels of land.  The parcels of land of which the Company could not obtain land use rights certificates covers a total of approximately 94.64 square kilometers of aggregate carrying value of $1,009,383 and approximately 92.32 square kilometers of aggregate carrying value of $743,275 as at June 30, 2011 and December 31, 2010, respectively.

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consist of the following:
 
   
June 30,
2011
   
December 31,
2010
 
At cost:
           
Mineral rights
  $ 6,151,933     $ 6,011,790  
Buildings (including salt pans)
    40,241,602       41,082,825  
Plant and machinery
    119,793,169       85,944,460  
Motor vehicles
    6,838       6,683  
Furniture, fixtures and equipment
    3,950,101       3,850,525  
Construction in progress
    4,609,456       -  
Total
    174,753,099       136,896,283  
                 
Less: Impairment
  (­­­3,190,041     -  
Less: Accumulated depreciation and amortization
    (30,939,611 )     (24,717,284 )
Net book value
  $ 140,623,447     $ 112,178,999  
 
The Company has certain buildings and salt pans erecting on parcels of land located in Shouguang, the PRC, and such parcels of land are collectively owned by local townships.  The Company has not been able to obtain property ownership certificates over these buildings and salt pans as the Company could not obtain land use rights certificates on the underlying parcels of land.  The Company could not obtain property ownership certificates covers certain properties of aggregate carrying value of $31,942,453 and aggregate carrying value of $33,868,298 as at June 30, 2011 and December 31, 2010, respectively.

During the three-month period ended June 30, 2011, depreciation and amortization expense totaled $4,120,097, of which $3,830,437 and $196,707 were recorded as cost of net revenue and administrative expenses respectively. During the three-month period ended June 30, 2010, depreciation and amortization expense totaled $2,410,053, of which $2,348,969 and $61,084 were recorded as cost of sales and administrative expenses respectively.  During the six-month period ended June 30, 2011, depreciation and amortization expense totaled $7,375,662, of which $6,805,179 and $570,483 were recorded as cost of net revenue and administrative expenses respectively. During the six-month period ended June 30, 2010, depreciation and amortization expense totaled $4,818,792, of which $4,696,076 and $122,716 were recorded as cost of sales and administrative expenses respectively.
 
    
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET – Continued

Construction in progress as at June 30, 2011 represented the construction and renovation costs incurred for new Factory No. 4, which is currently under construction.  In mid-May 2011, the local PRC government requested to recall the leased land of original Factory No. 4 for redevelopment and agreed to lease another parcel of land to the Company nearby to the existing Factory No. 4.  The amount of compensation is still under negotiation with the local PRC government.  The total construction cost of the new Factory No. 4 is approximately $6,721,620, which is expected to be completed by late August 2011.

The operations of the original Factory No. 4 were stopped in early July 2011 to cooperate with the demolition of factory and relocation of useful plant and machinery to new factory. For those fixed assets that could not be relocated to the new factory, the Company made impairment of $1,384,443 as of June 30, 2011 and included the impairment loss in write-off / impairment on property, plant and equipment.

In June 2010, the Company completed the construction of a production line for wastewater treatment chemical additives at a total cost of RMB60,000,000 (equivalent to $8,838,000). A retention payable of $453,000 as at December 31, 2010, representing 5% of the total cost, will be paid to Shouguang City Shengkun Construction Co., Ltd. upon one year after the completion date. The Company decided to switch the aforesaid production line to the production of pharmaceutical and agricultural chemical intermediates in mid-June 2011 as the Company experienced some technological limitations on extraction purity, which lead to a lower than expected gross margin for wastewater treatment chemical additives. An impairment of $1,805,598 was made as of June 30, 2011 and included in write-off / impairment on property, plant and equipment.

In late June 2011, the Company completed the enhancement projects to its crude salt fields, extraction wells and transmission channels and ducts at total costs of RMB210,113,600 (equivalent to $32,466,753). Retention payables of $1,623,338 as at June 30, 2011, representing 5% of the total costs, will be paid to Shouguang City Shengdou Construction Group Co., Ltd. and Shouguang City Shengkun Construction Co., Ltd. upon six months after the completion date. Certain protection shell of crude salt fields and transmission channels and ducts were replaced during the enhancement projects, write-off of $1,632,004 and $2,065,475, respectively, were made as of June 30, 2011 and included in write-off / impairment on property, plant and equipment.

For the three-month periods ended June 30, 2011 and 2010, repair and maintenance expense were $38,457 and $36,682, respectively. For the six-month periods ended June 30, 2011 and 2010, repair and maintenance expense were $89,090 and $61,813, respectively.

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NET

Property, plant and equipment under capital leases, net consist of the following:

   
June 30,
2011
   
December 31,
2010
 
At cost:
           
Buildings
 
$
127,157
   
$
-
 
Plant and machinery
   
3,094,127
     
-
 
Total
   
3,221,284
     
-
 
                 
Less: Impairment
   
(683,046
)
       
Less: Accumulated depreciation and amortization
   
(93,371
)
   
-
 
Net book value
 
$
2,444,867
   
$
-
 
 
The above buildings erecting on parcels of land located in Shouguang, the PRC are collectively owned by local townships.  The Company has not been able to obtain property ownership certificates over these buildings as the Company could not obtain land use rights certificates on the underlying parcels of land.  

During the three-month and six-month periods ended June 30, 2011, depreciation and amortization expense totaled $92,954, which was recorded as cost of net revenue.
 
An impairment of $683,046 was made as of June 30, 2011 and included in write-off / impairment on property, plant and equipment.
 
  
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)

 
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

   
June 30,
   
December 31,
 
   
2011
   
2010
 
Accounts payable
 
$
6,482,948
   
$
5,661,329
 
Salary payable
   
120,198
     
121,121
 
Social security insurance contribution payable
   
47,778
     
30,946
 
Amount due to a contractor
   
1,008,243
     
-
 
Other payable
   
385,522
     
606,339
 
Total
 
$
8,044,689
   
$
6,419,735
 
 
NOTE 8 – TAXES PAYABLE

 
Taxes payable consists of the following:
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
Income tax payable
 
$
5,372,871
   
$
4,377,314
 
Mineral resource compensation fee payable
   
685,336
     
486,585
 
Value added tax payable
   
1,174,217
     
1,031,525
 
Land use tax payable
   
526,288
     
966,397
 
Other tax payables
   
276,601
     
301,274
 
Total
 
$
8,035,313
   
$
7,163,095
 
   
NOTE 9 – CAPITAL LEASE OBLIGATION

 
The components of capital lease obligation are as follows:

 
 
Imputed
 
June 30,
   
December 31,
 
 
Interest rate
 
2011
   
2010
 
Total capital lease obligation
6.7%
 
$
3,039,238
   
$
-
 
Less: Current portion
     
(82,847
)
   
-
 
Capital lease obligation, net of current portion
   
$
2,956,391
   
$
-
 

Interest expenses from capital lease obligation amounted to $65,740 and $107,956 were charged to the income statements for the three-month and six-month periods ended June 30, 2011, respectively.
 
NOTE 10 – COMMON STOCK

In the fourth quarter of 2008, the Company granted to one Board member options to purchase a total of 12,500 shares of the Company’s common stock at an exercise price of $1.44 per share and the options vested immediately.  In February 2010, the Company issued 12,500 shares of its common stock upon the exercise of such stock options by the Board member.

In June 2010, the Company issued 70,560 shares of its common stock, valued at $608,227, to acquire assets owned by Mr Jinjin Li, Ms Qiuzhen Wang, Yueliang Wang, Kunming Tian, Gaoming Tian and Zhiqiang Wei.

In the second quarter of 2011, the Company issued 9,430 shares of its common stock based on the fair market price of $3.42 upon the cashless exercise of 12,500 stock options granted to a Board member.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)

 
NOTE 11 – TREASURY STOCK

In June 2011, the Company repurchased 100,500 common stock of the Company at an average price of $3.46 per share for a total cost of $348,147 under the approval of the Board of Directors.  The Company recorded the entire purchase price of the treasury stock as a reduction of equity.

NOTE 12 – STOCK-BASED COMPENSATION

 
Pursuant to the Amendment to the 2007 Equity Incentive Plan, the aggregate number of stock options available for grant and issuance is 4,341,989 shares.

In February 2011, the Company granted to the investor relations firm a warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $12.6 per share and the warrants vested immediately. The warrant was valued at $452,000 fair value, using the Black-Scholes option pricing model with assumed 193.42% volatility, a five-year expiration term, a risk free rate of 2.30% and no dividend yield. For the three-month and six-month periods ended June 30, 2011, $0 and $452,000 were recognized as general and administrative expenses, respectively.

In early March 2011, the Company granted to an independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $9.16 per share and the options vested immediately. The options were valued at $35,000 fair value, using the Black-Scholes option pricing model with assumed 64.5% volatility, a three-year expiration term with expected tenor of 1.49 years, a risk free rate of 0.46% and no dividend yield. For the three-month and six-month periods ended June 20, 2011, $0 and $35,000 were recognized as general and administrative expenses, respectively.

In late March 2011, the Company granted to 3 executive officers options to purchase 1,200,000 shares of the Company’s common stock at an exercise price of $4.97 per share and the options are exercisable in equal installments over periods of two years. The options were valued at $4,317,000 fair value, using the Black-Scholes option pricing model with assumed 77.22% to 94.36% volatility, a four-year expiration term with expected tenors of 2 to 2.49 years, risk free rates of 0.81% to 1.05% and no dividend yield. For the three-month and six-month periods ended June 30, 2011, $0 and $1,945,000 was recognized as general and administrative expenses, respectively.

In late March 2011, the Company also granted to 18 management staff options to purchase 654,000 shares of the Company’s common stock at an exercise price of $4.97 per share and the options are exercisable in equal installments over periods of three years. The options were valued at $2,632,000 fair value, using the Black-Scholes option pricing model with assumed 77.22% to 118.84% volatility, a four-year expiration term with expected tenors of 2 to 3 years, risk free rates of 0.81% to 1.29% and no dividend yield. For the three-month and six-month periods ended June 30, 2011, $0 and $706,000 were recognized as general and administrative expenses, respectively.

In early May 2011, the Company granted to an independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $2.93 per share and the option vested immediately. The option was valued at $15,800 fair value, using the Black-Scholes option pricing model with assumed 79.91% volatility, a four-year expiration term with expected tenor of 2 years, a risk free rate of 0.57% and no dividend yield. For the three-month and six-month periods ended June 30, 2011, $15,800 was recognized as general and administrative expenses.

In late June 2011, the Company granted to an independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $3.10 per share and the option vested immediately. The option was valued at $15,200 fair value, using the Black-Scholes option pricing model with assumed 86.36% volatility, a three-year expiration term with expected tenor of 1.49 years, a risk free rate of 0.32% and no dividend yield. For the three-month and six-month periods ended June 30, 2011, $15,200 was recognized as general and administrative expenses.

As of June 30, 2011, there was $4,298,000 of total unrecognized compensation cost related to non-vested stock options granted under the 2007 Equity Incentive Plan that is expected to be recognized in next 2 years.
 
    
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)

 
NOTE 12 – STOCK-BASED COMPENSATION – Continued

The following table summarizes all Company stock option transactions between January 1, 2011 and June 30, 2011.
 
   
Number of Option
and Warrants
Outstanding
   
Number of Option
and Warrants
Non-vested
   
Number of Option
and Warrants
Vested
   
Range of
Exercise Price per Common Share
 
Balance, January 1, 2011
    458,971       -       458,971       $0.84 - $12.00  
Granted during the six-month
period ended June 30, 2011
    1,941,500       1,941,500       -       $2.93 - $12.60  
Vested during the six-month period
ended June 30, 2011
    -       (905,500 )     905,500       $2.93 - $12.60  
Exercised during the six-month
period ended June 30, 2011
    (12,500 )     -       (12,500 )     $0.84  
Forfeited or expired during the six-
month period ended June 30, 2011
    (50,000 )     -       (50,000 )     $8.25 - $10.43  
Balance, June 30, 2011
    2,337,971       1,036,000       1,301,971       $2.93 - $12.60  

 
   
Stock and Warrants Options Outstanding
           
Weighted Average
 
Weighted Average
   
Outstanding
 
Range of
 
Remaining
 
Exercise Price of Options
   
at June 30, 2011
 
Exercise Prices
 
Contractual Life (Years)
 
Currently Outstanding
Exercisable
 
1,301,971
 
$2.93 - $12.60
 
3.16
 
$   6.49
Non-exercisable
 
1,036,000
 
$4.97
 
3.75
 
$   4.97
Total Outstanding
 
2,337,971
 
$2.93 - $12.60
 
3.42
 
$   5.82

 
The weighted average grant-date fair values as at June 30, 2011 and December 31, 2010 were $7.01 and $8.83, respectively.

At June 30, 2011, the aggregate intrinsic value of the stock options and warrants was $3,097,667.

NOTE 13 – INCOME TAXES

The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10.

(a)           United States

Gulf Resources, Inc. is subject to the United States of America Tax law at tax rate of 34%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the periods ended June 30, 2011 and 2010, and management believes that its earnings are permanently invested in the PRC. As of June 30, 2011 and December 31, 2010, the accumulated undistributed PRC earnings are $157,247,491 and $129,338,559, respectively.

(b)           BVI

Upper Class Group Limited was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the periods ended June 30, 2011 and 2010.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)

 
NOTE 13 – INCOME TAXES – Continued

(c)           Hong Kong

Hong Kong Jiaxing Industrial Limited was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong.  No provision for profits tax has been made as the Company has no assessable income for the period.  The applicable statutory tax rates for the periods ended June 30, 2011 and 2010 are 16.5%.

(d)           PRC
 
Enterprise income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the assessable profits.

The operating subsidiaries SCHC and SYCI are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Foreign Enterprise Income Tax Law.

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.

Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, as of June 30, 2011, the Company has not recorded any WHT on the cumulative amount of undistributed retained earnings of its foreign invested enterprises in China.  As of June 30, 2011 and December 31, 2010, the unrecognized WHT are $7,862,375 and $6,466,928, respectively.

The effective income tax expenses differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:

 
   
Three-Month Period
   
Six-Month Period
 
   
Ended June 30,
   
Ended June 30
 
Reconciliations
 
2011
   
2010
   
2011
   
2010
 
                         
Statutory income tax rate
    25 %     25 %     25 %     25 %
Non-deductible items and
  under-provision in prior periods
    0 %     0 %     3 %     1 %
Effective tax rate
    25 %     25 %     28 %     26 %
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)
 
NOTE 13 – INCOME TAXES – Continued

Significant components of the Company’s deferred tax assets and liabilities at June 30, 2011 and December 30, 2010 are as follows:

   
June 30,
   
December 31,
 
   
2011
   
2010
 
Deferred tax liabilities
 
$
-
   
$
-
 
                 
Deferred tax assets:
               
Allowance for obsolete and slow-moving inventories
 
$
1,712
   
$
1,674
 
Impairment on property, plant and equipment
   
968,272
     
-
 
Exploration costs
   
971,158
     
-
 
Property, plant and equipment
   
86,832
     
98,020
 
Property, plant and equipment under capital leases
   
8,306
     
-
 
US federal net operating loss
   
8,895,208
     
7,698,225
 
                 
Total deferred tax assets
   
10,931,488
     
7,797,919
 
                 
Valuation allowance
   
(8,895,208
)
   
(7,698,225
)
                 
Net deferred tax asset
 
$
2,036,280
   
$
99,694
 
                 
Current deferred tax asset
 
$
1,712
   
$
99,694
 
                 
Long-term deferred tax asset
 
$
2,034,568
   
$
-
 

There was no unrecognized tax benefits and accrual for uncertain tax positions as of June 30, 2011 and December 31, 2010.

Tax returns filed regarding tax years from 2004 through 2010 are subject to review by the respective tax authorities.
  
NOTE 14 – BUSINESS SEGMENTS

The Company has three reportable segments:  bromine, crude salt and chemical products.
 
Three-Month Period Ended
June 30, 2011
 
Bromine *
   
Crude
 Salt *
   
Chemical
 Products
   
Segment
 Total
   
Corporate
   
Total
 
                                     
Net revenue
 
$
33,230,646
   
$
5,994,384
   
$
12,075,782
   
$
51,300,812
   
$
-
   
$
51,300,812
 
Income (loss) from operations
   
9,448,177
     
1,926,627
     
2,029,160
     
13,403,964
     
(407,653
)
   
12,996,311
 
Income taxes
   
2,466,262
     
379,478
     
506,605
     
3,352,345
     
-
     
3,352,345
 
Total assets
   
146,989,573
     
52,795,615
     
42,676,361
     
242,461,549
     
3,013,131
     
245,474,680
 
Depreciation and amortization
   
2,859,567
     
578,359
     
682,171
     
4,120,097
     
-
     
4,120,097
 
Capital expenditures
   
24,737,693
     
16,185,485
     
37,664
     
40,960,842
     
-
     
40,960,842
 
Write-off / Impairment      3,749,435       2,015,533       1,805,598       7,570,566       -       7,570,566  
 
  
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)

NOTE 14 – BUSINESS SEGMENTS – Continued
 
Three-Month Period Ended
June 30, 2010
 
Bromine *
   
Crude
 Salt *
   
Chemical
 Products
   
Segment
 Total
   
Corporate
   
Total
 
                                     
Net revenue
 
$
30,940,347
   
$
4,043,723
   
$
11,767,739
   
$
46,751,809
   
$
-
   
$
46,751,809
 
Income (loss) from operations
   
15,627,586
     
3,051,102
     
3,389,772
     
22,068,460
     
(191,054
)
   
21,877,406
 
Income taxes
   
4,088,467
     
571,087
     
851,179
     
5,510,733
     
-
     
5,510,733
 
Total assets
   
123,191,728
     
23,437,717
     
35,466,253
     
182,095,698
     
53,107
     
182,148,805
 
Depreciation and amortization
   
1,741,822
     
246,386
     
421,845
     
2,410,053
     
-
     
2,410,053
 
Capital expenditures
   
10,407,637
     
4,214,008
     
2,641,140
     
17,262,785
     
-
     
17,262,785
 
 
Six-Month
Period Ended
June 30, 2011
 
Bromine *
   
Crude
 Salt *
   
Chemical
 Products
   
Segment
 Total
   
Corporate
   
Total
 
                                     
Net revenue
 
$
63,379,962
   
$
11,028,718
   
$
22,270,664
   
$
96,679,344
   
$
-
   
$
96,679,344
 
Income (loss) from operations
   
25,798,291
     
5,873,545
     
5,385,697
     
37,057,533
     
(3,819,714
)
   
33,237,819
 
Income taxes
   
6,742,153
     
1,192,917
     
1,350,397
     
9,285,467
     
-
     
9,285,467
 
Total assets
   
146,989,573
     
52,795,615
     
42,676,361
     
242,461,549
     
3,013,131
     
245,474,680
 
Depreciation and amortization
   
5,014,155
     
1,098,678
     
1,355,783
     
7,468,616
     
-
     
7,468,616
 
Capital expenditures
   
31,649,079
     
16,185,485
     
37,664
     
47,872,228
     
-
     
47,872,228
 
Write-off / Impairment      3,749,435       2,015,533       1,805,598       7,570,566             7,570,566  
 
Six-Month
Period Ended
June 30, 2010
 
Bromine *
   
Crude
 Salt *
   
Chemical
 Products
   
Segment
 Total
   
Corporate
   
Total
 
                                     
Net revenue
 
$
48,002,907
   
$
6,877,621
   
$
21,564,699
   
$
76,445,227
   
$
-
   
$
76,445,227
 
Income (loss) from operations
   
22,828,098
     
4,976,418
     
6,753,287
     
34,557,803
     
(1,625,171
)
   
32,932,632
 
Income taxes
   
6,057,402
     
896,765
     
1,695,240
     
8,649,407
     
-
     
8,649,407
 
Total assets
   
123,191,728
     
23,437,717
     
35,466,253
     
182,095,698
     
53,107
     
182,148,805
 
Depreciation and amortization
   
3,424,609
     
519,605
     
843,460
     
4,787,674
     
-
     
4,787,674
 
Capital expenditures
   
10,407,637
     
4,214,008
     
7,040,639
     
21,662,284
     
-
     
21,662,284
 

* Certain common production overheads, operating and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments in SCHC were split by reference to the average selling price and production volume of respective segment.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)

NOTE 14 – BUSINESS SEGMENTS – Continued
 
   
Three-Month Period
   
Six-Month Period
 
   
Ended June 30,
   
Ended June 30
 
Reconciliations
 
2011
   
2010
   
2011
   
2010
 
                                 
Total segment operating income
  $ 13,403,964     $ 22,068,460     $ 37,057,533     $ 34,557,803  
Corporate overhead expenses
    (407,653 )     (191,054 )     (3,819,714 )     (1,625,171
Other income
    379,289       59,772       435,902       135,356  
Income tax expense
    (3,352,345 )     (5,510,733 )     (9,285,467 )     (8,649,407 )
                                 
Total consolidated net income
  $ 10,023,255     $ 16,426,445     $ 24,388,254     $ 24,418,581  
 
The following table shows the major customer(s) (10% or more) for the three-month period ended June 30, 2011.

Number
 
Customer
 
Bromine
(000’s)
   
Crude Salt
(000’s)
   
Chemical Products
(000’s)
   
Total
Revenue
(000’s)
   
Percentage of
Total Revenue (%)
 
 1  
Shandong Morui Chemical Company Limited
  $ 3,507     $ 1,121     $ 760     $ 5,388       10.5%  
TOTAL
      $ 3,507     $ 1,121     $ 760     $ 5,388       10.5%  

The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2011.

Number
 
Customer
 
Bromine
(000’s)
   
Crude Salt
(000’s)
   
Chemical Products
(000’s)
   
Total
Revenue
(000’s)
   
Percentage of
Total Revenue (%)
 
 1  
Shandong Morui Chemical Company Limited
  $ 9,238     $ 1,963     $ 1,329     $ 12,530       13.0%  
 2  
Shouguang City Rongyuan Chemical Company Limited
  $ 7,285     $ 2,622     $ -     $ 9,907       10.3%  
TOTAL
      $ 16,523     $ 4,585     $ 1,329     $ 22,437       23.3%  

The following table shows the major customer(s) (10% or more) for the three-month period ended June 30, 2010.

 
Number
 
Customer
 
Bromine
(000’s)
   
Crude Salt
(000’s)
   
Chemical Products
(000’s)
   
Total
Revenue
(000’s)
   
Percentage of
Total Revenue (%)
 
 1  
Shouguang City Rongyuan Chemical Company Limited
  $ 4,097     $ 1,047     $ -     $ 5,114       11.0%  
TOTAL
      $ 4,097     $ 1,047     $ -     $ 5,114       11.0%  

The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2010.

Number
 
Customer
 
Bromine
(000’s)
   
Crude Salt
(000’s)
   
Chemical Products
(000’s)
   
Total
Revenue
(000’s)
   
Percentage of
Total Revenue (%)
 
 1  
Shouguang City Rongyuan Chemical Company Limited
  $ 6,712     $ 1,546     $ -     $ 8,258       10.8%  
TOTAL
      $ 6,712     $ 1,546     $ -     $ 8,258       10.8%  
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)

NOTE 15 – MAJOR SUPPLIERS

During the three-month and six-month periods ended June 30, 2011, the Company purchased 81.1% and 81.6% of its raw materials from its top five suppliers, respectively.  At June 30, 2011, amounts due to those suppliers included in accounts payable were $5,094,255. During the three-month and six-month periods ended June 30, 2010, the Company purchased 90.8% and 91.2% of its raw material from top five suppliers, respectively.  At June 30, 2010, amounts due to those suppliers included in accounts payable were $9,403,022. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

NOTE 16 – CUSTOMER CONCENTRATION

The Company sells a substantial portion of its products to a limited number of customers.  During the three-month and six-month periods ended June 30, 2011, the Company sold 40.8% and 43.9% of its products to its top five customers, respectively. At June 30, 2011, amounts due from these customers were $16,417,668. During the three-month and six-month periods ended June 30, 2010, the Company sold 41.7% and 41.7% of its products to its top five customers, respectively.  At June 30, 2010, amounts due from these customers were $11,616,499. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The carrying values of financial instruments, which consist of cash, accounts receivable and accounts payable, other receivables and other payables, approximate their fair values due to the short-term nature of these instruments.  There were no material unrecognized financial assets and liabilities as of June 30, 2011 and December 31, 2010.

NOTE 18 – RESEARCH AND DEVELOPMENT EXPENSES

On September 6, 2007, SYCI and East China University of Science and Technology formally opened a Co-Op Research and Development Center. The research center is equipped with state of the art chemical engineering instruments for the purpose of pursuing targeted research and development of refined bromide compounds and end products. According to the Co-Op Research Agreement, any research achievement or patents will become assets of the Company. Originally, the Company will provide $500,000 annually until June 2012 to East China University of Science and Technology for research. On June 7, 2011, the Company and East China University of Science and Technology mutually agreed to terminate the Co-op Research Agreement due to the successful completion of the cooperative research and development tasks related to the development of bromine-related chemical products for the Company.

Since the second quarter of 2010, SYCI conducted research for the new production line of wastewater treatment additives, the purpose of which is for the testing of the manufacturing routine and samples. The new production line was started operation and normal production in April 2011. However, the Company decided to switch the aforesaid production line to the production of pharmaceutical and agricultural chemical intermediates in mid-June 2011 as the Company experienced some technological limitations on extraction purity, which lead to a lower than expected gross margin for wastewater treatment chemical additives. The research and development expense incurred for the new production line of wastewater treatment additives from outside parties and the consumption of bromine produced by the Company during the three-month period ended June 30, 2011 were $12,261 and $13,158, respectively. The research and development expense incurred for the new production line of wastewater treatment additives from outside parties and the consumption of bromine produced by the Company during the six-month period ended June 30, 2011 were $33,813 and $43,226, respectively.

The total research and development expense recognized in the income statements during the three-month periods ended June 30, 2011 and 2010 were $133,519 and $596,151, respectively. The total research and development expense recognized in the income statements during the six-month periods ended June 30, 2011 and 2010 were $313,856 and $721,353, respectively.

NOTE 19 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS

The Company has leased a real property adjacent to Factory No. 1, with the related production facility, channels and ducts, other production equipment and the buildings located on the property, under capital lease.  The future minimum lease payments required under capital lease, together with the present value of such payments, are included in the table show below.
 
 
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Expressed in U.S. dollars)
(UNAUDITED)

NOTE 19 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS – Continued

The Company has leased five pieces of land under non-cancelable operating leases, which are fixed in rentals and expired through December 2030, December 2040, February 2059, August 2059 and June 2060, respectively. The Company accounts for the leases as operating leases.

The Company has committed (i) approximately $105,460 for conversion of the new wastewater treatment additives production to the production of pharmaceutical and agricultural chemical intermediates, (ii) approximately $1,680,405 for relocation and construction of new Factory No. 4 and (iii) approximately $3,115,123 for the drilling of exploratory wells and its associated facilities in Sichuan province as of June 30, 2011.

The following table sets forth the Company’s contractual obligations as of June 30, 2011:

   
Capital Lease Obligations
   
Operating Lease Obligations
   
Purchase Obligations
   
Contract for
R&D expenses
 
                         
Less than 1 year
 
$
290,034
   
$
317,624
   
$
4,900,988
   
$
-
 
1 - 3 years
   
580,068
     
1,247,879
     
-
     
-
 
3 - 5 years
   
580,068
     
1,265,104
     
-
     
-
 
More than 5 years
   
4,205,494
     
17,852,586
     
-